by Michael Hurwich, President SPMG
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| Loyalty Programs generally help boost customer retention, |
The following case study is a composite made up of the actual experiences of several companies that have adopted loyalty based pricing programs. It has been written to provide an example of a successful program while maintaining the confidentiality of the companies involved.
BACKGROUND
COMPANY (A), a dominant force in the high technology industry, was facing the entrance of a new competitor (Company D). At the time, there were two other significant players in the industry, and while (A) enjoyed a 75%+ market share, some customers were showing signs of dissatisfaction. Complaints that (A)’s dominant position in the market had led to arrogance and an inflexible attitude were becoming more frequent. Indeed, many buyers made no attempt to hide their enthusiasm for the impending entry of a new competitor for Company A. Against this backdrop; (A) began to search for a pricing strategy to defend itself from possible market share erosion while maintaining profitability.
THE DECISION TO LAUNCH A LOYALTY PROGRAM
In the search for a defensive pricing strategy, Company A explored the feasibility of implementing a loyalty program. While management was wary of the amount of time and resources that would go into implementing a loyalty program, they also recognized that a loyalty program might be their best defense against the new competitor, for several reasons.
For starters, a loyalty program would send a strong signal to customers that (A) was prepared to recognize and reward their loyalty in the face of new competition. This was an especially important message to communicate, given (A)‘s reputation for arrogance and inflexibility.
Management also realized that a loyalty program could be a tactic where pricing details would not be readily transparent to competitors. A loyalty program would thus be unlikely to incite immediate price retaliation from the new entrant. In addition, if successfully executed, the program would provide a long-term competitive advantage to (A) by discouraging customers from diverting business to the new entrant. Finally, management concluded that if they did not implement a loyalty program, the new entrant might.
The advantages of being first in an industry to implement a loyalty program are usually enormous. Once a customer has made a commitment to a particular program, it is often difficult to dislodge the customer‘s loyalty. (Consider how often members of a particular frequent flyer program go out of their way to fly with ”their” airline.)
DESIGNING THE LOYALTY PROGRAM
One of the first steps taken by Company (A) in designing the loyalty program was to hold a brainstorming session with the sales force to determine what products or services offered by (A) were highly valued by its customers and, at the same time, not replicable by any of its competitors. During the brainstorming session, the group identified (A)‘s breadth of product offerings as key to implementing a successful loyalty program. In essence, (A) was the only significant supplier of a full systems solution, encompassing both hardware and software. By leveraging off this dominant position, (A) management felt it could also promote customer loyalty.
PARAMETERS OF THE RPOGRAM
The program provided customer discounts based on three major criteria:
· Percentage of (A)’s product bought relative to purchases from the competition
· Volume purchased of a single product
· Number of different products purchased.
THE RESULTS
This loyalty program was a tremendous success for Company (A). Not only was the potential erosion of both margin and sales halted, but many current customers actually increased their purchases. Moreover, although other competitors – including the new entrant – attempted to introduce their own loyalty programs, (A) had achieved the dual advantage of being first in the industry to implement a program, and designing a program based on features that were very difficult for competitors to copy.
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